What exactly is on-demand insurance?


On-demand service is everywhere; people all over the world use Uber or order food delivery for dinner instead of preparing their own meal in their kitchen.

With new technology, insurers are also providing on-demand coverage, allowing consumers to turn it on and off as needed.

We will first explain how on-demand insurance works in this article. Then we’ll take a quick look at various types of on-demand insurance product offerings. And, finally, we will investigate the potential issues that may arise from this type of product.


What exactly is on-demand insurance?

On demand insurance is a digital insurance model that allows potential customers to turn their insurance on and off – and only pay for the time when they need protection. The process, which is carried out via a smartphone app, is quick and simple, and the service is subscription-based and has clear pricing. On-demand insurance allows you to purchase policies online without having to deal with a broker or a company representative. Customers can purchase insurance through their smartphones.

Also read: 12 Best Strategies on How to Get Insurance Leads Online?

There are typically no long-term contracts, lengthy forms, or the need to speak with a representative over the phone, making insurance coverage as simple as a smartphone swipe. Premiums for these micro-duration policies are typically paid in-app, and claims are filed via a mobile chat interface.

How does it function?

In comparison to traditional insurance, on-demand insurance has a lower per-policy premium value and a higher transaction volume. Users can easily toggle coverage on and off using their mobile devices.

To provide a frictionless customer experience while managing the dynamic and changing risks involved, the on-demand business model necessitates the development of new capabilities, such as:

Customer-centered product design

On-demand insurance bridges the gap where traditional insurance may appear rigid or “over-insured.” Insurers must put the consumer first in order to provide products that cover them for exactly what they need, when they need it. This entails creating a simple product with variable pricing and a flexible term.

Data collection via multiple channels

Insurers will be able to tap into discrete data about coverage duration and risk profile in real-time using connected technologies and IoT devices (e.g., telematics, wearables, or mobile phones with sensors).

The data is then used to calculate the premium by assessing the extent of usage as well as the risk profile (e.g., how fast or high a drone is flown) of the insured events.

A powerful data analytics system

Some on-demand insurance (for example, usage-based insurance for automobiles) necessitates continuous underwriting, which means constantly updating the risk profile of the insured event in order to adjust terms and pricing.

This necessitates a strong rating system capable of analyzing and calculating new rates based on the updated risk profile.

Who would benefit from on-demand insurance?

On-demand insurance is best suited for customers who are exposed to risks that are not covered by traditional insurance policies or who are not exposed to these risks on a regular basis.

On-demand insurance is a “pay-as-you-go” policy that only charges for what you use. When compared to traditional fixed-term insurance policies, this can save these people money.

There are three types of on-demand insurance.

On-demand insurance fragments traditional insurance and caters to episodic or period events where traditional coverage is deemed inflexible and too expensive.

Shifts in on-demand insurance include: shifting from fixed duration to episodic/periodic underwriting; shifting from point-in-time to continuous underwriting; shifting from bundled offerings to customizable coverage; and shifting from static to dynamic pricing. This shift corresponds to three types of products:

  1. Microinsurance typically covers smaller risks for a limited time, event, or occasion. These include travel, events, and the protection of high-value assets for a set period of time (e.g a high-end camera during a trip).
  2. Asset and liability insurance – in the sharing economy – Protects against the risk of assets or liabilities arising from the sharing of such assets. Homesharing (Airbnb), ridesharing (Uber, Lyft), and skill-sharing are examples of these (Task Rabbit).
  3. Usage-Based Insurance Continuous underwriting is required, which means that the risk profile of an individual or object must be constantly updated. This is enabled by the continuous flow of data from IoT devices such as telematics in automobiles, home IoT devices, and wearables.

The On-Demand Insurance Issue

To remain profitable, insurers require a large client base. The on-demand offering has a higher per-use rate than a traditional annual policy, resulting in a higher profit margin for the insurer.

However, because the premium size is smaller, insurers may lose revenue if the volume is not large enough. It will only work if more people begin to purchase these products.

The question of scale arises: how many insurers can design and run a full insurance business based on a model with smaller premiums, higher risks, and lower overall profit?

A larger capital reserve is needed.

To cover the additional risk, an insurer will need to reserve more capital than they would for a traditional product before they can aggregate a sufficient amount of business based on the overall.

This means they have less capital available to invest in their business. As a result, the insurance company’s overall profitability is likely to suffer.

Possibility of fraudulent claims

Some customers are likely to take advantage of the on-demand insurance services. They can only activate the insurance after the damage has occurred. And they will try to file a claim claiming that the damage occurred prior to it.

Fraudulent claims continue to be a threat to insurer profitability, whether on-demand or traditional insurance. To mitigate the impact of such attempts, insurance companies will need to develop novel tracking systems or business models.

On-Demand Insurance example.

Many companies are developing insurance products specifically for gig economy workers such as Uber and Lyft drivers.

In such cases, users can drive around with a standard personal insurance policy. However, as soon as they log into Uber or Lyft, an additional layer of protection is activated. As a result, users are not required to buy two annual policies. They can upgrade as needed. In such cases, the premium is calculated on a per-mile basis. Insurance companies can determine the exact number of miles driven using sensors and other devices and charge premiums accordingly.

Similarly, if a person rents their home on Airbnb for the weekend, they can use a mobile app to purchase insurance only for the weekend. Even if they are only renting for a few days, they do not need to have an insurance policy for the entire year. Similarly, some people may be concerned that their expensive equipment, such as a camera, will be in danger while traveling.

In such cases, they can also purchase insurance only for the duration of their trip. They don’t have to pay a premium for the rest of the year because the camera will be safely stored in the house.

The fundamental premise of on-demand insurance is that it should be easily accessible and purchasable online. This requires users to keep a record of everything valuable they own on an insurance website. They can then use their mobile devices to turn on and off the insurance coverage as needed.

Insurance Issues in the On-Demand Economy

Consider the insurance requirements of a person who works in the gig economy. The user typically uses their vehicle for both personal and commercial purposes.

The issue is that the insurance policies available for both of these scenarios are vastly different. As a result, if the user purchases two separate insurance policies, the costs may become prohibitively expensive. The same is true for people who rent out their homes on Airbnb.

The insurance policy does not cover any damage that occurs while the property is being used for commercial purposes. If a separate policy is purchased for this purpose, the coverage becomes prohibitively expensive.

The issue in both of these cases is that the insurance is sold on an annual basis. As a result, even if a person rents out their home for ten days a year, they must pay the premium for the entire year. This is where the on-demand insurance marketplace can help. These services enable users to purchase insurance for the products they require for a limited time.

Do You Need On-Demand Insurance?

Although on-demand insurance is not everyone’s first choice, it can be useful in certain situations.It is best suited to those who:

  • They may be exposed to risks that are not covered by their standard insurance policy.
  • Need temporary insurance but don’t want to pay the higher cost of traditional insurance.
  • Need additional coverage in addition to what their insurance provides.

On-demand insurance may be a good option for consumers who don’t need coverage on a regular basis or who don’t want to pay an annual premium for sporadic coverage. However, before reducing or discontinuing your traditional insurance coverage, carefully consider your insurance needs.

Final thoughts

On-demand insurers have grown in popularity in recent years. In response to rapidly changing customer needs, they are proactively experimenting and introducing new on-demand products to markets. And we anticipate that both incumbents and disruptors will make their voices heard in the marketplace.

While on-demand insurance may not become the default offering for all insurance types in the near future, it will be most relevant to tech-savvy customers, whether for leisure, such as with drones, travel with an expensive camera, when taking a laptop on vacation, or as a new source of income, such as driving for Uber or hosting with Airbnb.


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